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Responsible capitalism

Amidst the current political polarization and dysfunctional institutions, it is imperative for the private sector to step up and change the world for the better. Private sector has proved to be dynamic in nature and promote innovation and creativity. They have the ability to support activities with positive impact on society. And with the recent rise in small social enterprises, profit with purpose is becoming the new norm. CEO’s of the future want their companies to be acknowledged as forces for good.

In 2018, the Edelman Trust Barometer shows that globally people had more trust in businesses as compared to in the government. Almost 64% of people expected CEOs to lead a social change as opposed to their government. And 84% expected CEOs to have a say in policy debates related to social issues. This critical juncture provides an opportunity. Can social enterprise be basis for the future business models?

This question becomes even more imperative given that recent evidence suggests the inability of governments and civil society to work in isolation towards the world’s most pressing problems. Majority of the current impact investment has been confined to a niche but now it’s time for the private sector to step up in the form of social enterprises and dynamic public-private partnerships. In the last three decades, private sector has attempted to tackle climate change, gender gap and other imperative issues. Private sector also has a tendency for a strong bandwagon effect and collectively they have the power to change corporate investment behaviour towards sustainable systems and infrastructure.

Pakistan enjoys a privilege based on its youthful demographic profile. Our median age is 22 years and almost 64% of the population is below the age of 30. Based on this, technological growth is relevant and urgent as we have young, digitally-savvy population with decent smartphone penetration rate but suffering from high youth unemployment rate. This provides an opportunity to support start-ups and create jobs by reducing the hassle around e-commerce. Moreover, focus on training on digital and data skills for youth, men and women.

SMEs already play an instrumental role in Pakistan. SMEs constitute nearly 90% of all the enterprises and employ 80% of non-agriculture labour force while contributing almost 40% to the GDP. A 2017 report by Planet N reported that the number of start-ups launched after 2010 increased to 723, with 68 raising funding, of which six secured an investment greater than $500,000. And they have the far more potential to create jobs and foster innovation.

Though what does it take to build a world-class, scalable SME ecosystem? How can we use innovative technologies to change the lives of masses for good?

 

Following are the three main important lessons that Pakistan can learn from countries like China that have recently developed an efficient start-up ecosystem.

1- Access to financing

Start-ups are key to the journey to knowledge economies and for businesses to start and thrive, access to funding is crucial. We need to properly finance our start-up ecosystem. Along with private funding, government spending and subsidies need to be introduced.

Previous research has shown that access to finance for SMEs is facilitated by the following factors. Greater macroeconomic stability plays an important role as it signals private sector confidence and increased supply and demand of credit. Strong banking sector offers robust and sound financial inclusive credit especially to SMEs. Low public-sector size is translated in lower risk of crowding out of credit and it creates a level playing field offering fair competition. Where healthy economic competition promotes resilience and productivity. Moreover, widely accessible information on available credit is essential for the decision-making management of SMEs. Lastly, stronger legal and institutional framework underlying issues such as property rights, contracts and collateral that safeguards the rights of SME owners are significant.

Local governments should establish entrepreneurship centres and provide adequate financing to venture capital firms and start-ups. Policymakers can set a limit like China where 20% of venture capital funds financing has to come from the government. Moreover, they can facilitate through tax benefits to incentivise private investors.

While banks are the most dominant source of credit for SMEs, other financing channels such as capital markets, SME specific equity markets, crowd funding, seed capital and even peer to peer platforms also have a role to play. The later have a higher risk but reduce the need for extensive paperwork and tedious processes. Though, a pre-requisite for all these alternative financing channels is an efficient legal and regulatory framework.

2- A clear industrial policy

Entrepreneurs, venture capital funds and governments can benefit from deeper connection. To take advantage of fourth industrial revolution, the right support system and regulations must be in place. Government needs to commit to fostering a dynamic ecosystem. Start-ups especially related to tech and innovation should be part of national strategic agenda. Lack of a comprehensive policy related to start-ups hinders growth and innovation as private investors are reluctant to finance due to higher perceived risk.

There are many elements that come into play to establish and smoothly run such ecosystems. Some of these are directly linked to policymakers such as reducing and simplifying the bureaucratic process. Others relate to social changes like strong academic base, diversifying the work culture and sectoral hierarchies.

3- Create dominant players

While America has Facebook, Amazon, Netflix and Google, China has Baidu, Alibaba and Tencent. These three major players in China have invested in 30% of the top Chinese start-ups. Dominant local players have resources that help others grow through synergies and funding. International giants like Facebook and Google have high penetration rates globally, however, they are not interested in creating long-term local ecosystems. Thus, the need to strategically promote local players to compete for market share, gathering revenues and data from local users. This is an important practice in China that has helped them grow local start-ups and can also help Pakistan.

Conclusively, Pakistan can take a different route than US or China, but if it wants to establish a local ecosystem, it has to develop a strong and concise industrial policy for its start-up sector that encourages local financing, adequate guidance for start-ups and regulations related to issue like competition, access to credit, copy rights and solvency frameworks. Thus, holistic policy strategies as opposed to few measures are required to create a loop for meaningful and sustainable SME participation, transparency and more formal environment that brings broader socio-economic benefits.

The writer is a Research Associate — Sustainable Development Policy Institute (SDPI)

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